Saturday, July 9, 2011

The other day, Silas Barta asked: "When are you going to talk about the economic evils of bitcoin? Like how it doesn't allow subjective central bank manipulation and such?" He's randomly asked me this in other fora as well. I guess he's really interested in what I have to say about this. The answer is - not all that much. My response was:

"Silas - bitcoin sounds like a great idea. If it can profitably respond to excess money demand that is to its credit.

Can it?

I don't know.

But I'm certainly not aware of anything that's not to like about bitcoin. As far as I can tell I am pro-bitcoin. What I'm not is anti-Federal Reserve, and I think that's the point that you are confusing here and over at Bob's blog, where you were similarly convinced you had me figured out."

I'm usually fairly silent when free banking comes up because I'm not that well read on it. I will say I'm fine with central banking, but I'm not prepared to offer an opinion on free banking. I certainly don't have a problem with free banking (in the sense of denationalized currencies) amidst a central bank, such as the case of bitcoin. What would I possibly dispute about that? I'm not sure what there is to object to.

However, what I think about abolishing central banks is a different matter. I would only be comfortable abolishing central banks if I thought that free banking was somehow equipped to respond to increases in money demand. Is it? I don't know the theory behind that. It would seem to be a situation of monopolistic competition, right? They're not issuing undifferentiated goods - the value of any given bank's money is highly dependent on who else will accept it and the stability of the bank. That would imply that each bank would have market power and we'd expect some sort of money demand problems to remain (not that central banking always responds to money demand, but at least they have the opportunity and potentially the incentive to, where no such incentive seems to exist under free banking).

Anyway - my question (which I'm taking a while to get out) is more empirical than that and it is this:

A lot of prominent free bankers accept a monetary disequilibrium model of recessions and accept that we have a lot of excess money demand right now. You would think this would bring free bankers into the market. Nothing is really stopping them to my knowledge. Shouldn't the absence of free bankers signal something about the viability of free banking?Imagine if the government manufactured cars, but did not stop the private sector from manufacturing cars too. Let's say the government didn't produce enough cars so there was excess demand for cars at a given price. If no carmakers entered the market at this point we would say that one of two things was happening: (1.) maybe there isn't actually an excess demand for cars, or (2.) maybe there's something about cars that prevents the market from optimally supplying them.

In the case of money, we can rule (1.) out at least in conversation with reasonable free bankers who do acknowledge an excess demand for money. What else is left except to conclude (2.)?

The mere emergence of Bitcoin seems to me to be proof that we really are suffering from an excess money demand problem here. I didn't need much more proof at this point, but I do think it's additional proof. But the fact that Bitcoin isn't explosively growing right now and that nobody really is getting into this game pushes the empiricist in me to be suspicious about free banking as any sort of solution to our monetary problems.

Contra Silas's strange assumptions about me, if people think they can make the world better in a non-profit way or earn lots of money by introducing their own currencies as for-profit free banks, I am 100% in support of it. It's unclear to me, though, why I should look to that as an ultimate solution to our macroeconomic problems.

There is a clear obstacle to central banks solving our problems: public choice issues, ignorance, and timidity.

What is the obstacle to free bankers solving our problems? Why aren't they rushing into a market with considerable excess demand. After all, they're supplying a product with very little marginal production costs. If free banking offered a solution, wouldn't we be awash in free bankers right now?

14 comments:

Except the government does from time to time prohibit the creation of alternative currencies. 18 USC 486, 514 are some of the relevant statutes regarding this issue. Also note that the government claims that efforts like the "Liberty Dollar" a kin to "terrorism," so there is most definitely some murkiness involved in this.

How would one create a bank in the U.S. which didn't have to meet all the federal and state laws* regarding regarding banking in the U.S.? Free banking has never existed in the U.S. because there has always been a special legal structure for the regulation of banks in the U.S. So I'm kind of confused about your claim. If an institution acts like a bank, then it is going to fall under regulation, and thus it will be able to practice free banking.

*State laws to my knowledge have not been wholely pre-empted by the federal regulation of banks, but I may be wrong about that.

Also, we've already seen politician-asshats like Schumer talk about bitcoin as a form of money laundering. Which of course just proves that Schumer is an idiot (think a second about why money laundering is brilliantly moronic and self-defeating via bitcoin).

Certainly we have bank regulations, but banks provide all kinds of financial products that presumably are characterized by considerably less excess deman than money is.

If a bank can survive in a regulated banking system by providing a financial product that has a very tight, competitive market why couldn't that same bank also enter a market characterized by way more excess demand and lower marginal production costs?

Generating money with no returns is considerably easier for a bank to do than generating funds, certificates, and accounts that promise high returns. And there's excess deman for that sort of money. Any bank that can survive producing non-money products in the current regulatory environment should have no barriers to producing money - at least no barriers from the regulatory system.

And as long as they're not counterfeiting federal money, what other obstacles are there?

This is my question - I can't think of any - can you? Why aren't they jumping into a market which many free bankers agree is characterized by lots of excess demand?

Why is Bitcoin the only one, and why do we still have excess demand for money despite the existence of Bitcoin?

Could it be that, perhaps, there are network externalities associated with the medium of exchange that produce a positive externality and therefore underproduction of money by profit seeking institutions?

On the Shumer point - I don't mean to be completely flippant about political meddling, but this is a really frustrating cop-out in my opinion.

Michelle Bachmann recently said she'd do away with pornography. She's not the first. Why is porn doing just fine?

Economists across the political spectrum agree that there is a very large excess demand for money right now. Presumably the market for porn clears at an equilibrium quantity and price. They pursue those profit opportunities just fine, despite being embattled politically.

You have to come up with something better than that if you want to convince an economist that financially savvy firms who are widely thought to have captured the regulatory apparatus would be afraid to take advantage of this profit opportunity.

If it is regulated in some sort of special way it is by definition not free banking. Free banking is defined in that way; as no special regulation. So I'm still sort of confused why you keep using that term when it is impossible to have legal free banking in the U.S.

The "liberty dollar" people were not to my knowledge arguing that the stuff they were minting was "legal tender" (I've never seen one of the coins they made so I can't say for sure). So what you are suggesting is that the statute's language is so clear that what is and is not counterfeiting to a person who may want to create an alternative currency will not be afraid of prosecution. I think that claim is dubious at best. Why can't you see how this is a murky area? Because you know, prosecutors are never capricious; they never inflate the nature of the federal criminal laws to cover stuff that it should not ostensibly cover. That's all I'm suggesting; not that one should be pro-counterfeiting or that Selgin or Horwitz are pro-counterfeiting. Of course anyone with half a brain would realize what I am getting at here.

We live in an overcriminalized country full of overly vague laws. So when it comes creating alternative currencies to simply say that the government doesn't prohibit them is a bit silly and ignores the very murky reality of the situation. That's the "reality" of the current power structure. How you go off on the tangent you go off on I can't say, but I'm not making the claims that you think I am making.

re: "If it is regulated in some sort of special way it is by definition not free banking. Free banking is defined in that way; as no special regulation. So I'm still sort of confused why you keep using that term when it is impossible to have legal free banking in the U.S."

I'm using the term "free banking" cause it's commonly recognized.

Forget the term if this is what you're getting hung up on.

There is considerable excess demand for money.

Why aren't firms creating private money?

I have my doubts that counterfeiting laws, bank regulations, and Chuck Shumer's hand-wringing are holding them back. Those sorts of things haven't held the financial sector back from other profit opportunities characterized by considerably less excess demand.

Well, you aren't using it the way that folks who promote it use the term.

Anyway, there are actually lots and lots of companies who do create private money and loan it to people; we just don't normally recognize it as such because it isn't in the form of dollars or whatever. In fact, a shit ton of commercial transactions are associated with private money.

However that seems like a totally different beast to me in comparison to a private currency; or free banking or whatever.

I really don't understand the point you're driving at here. But free banking is impossible to do legally in the U.S. and is plenty of private money being used in the U.S.

There are various problems with Bitcoin: Its nerdiness, missing confidence in its issuers plus they didn't just create a currency but also included an anoymous p2p transaction system that no layman can understand.

I had an essay on free banking on my blog, but obviously that no longer exists and I no longer have it on my computer (otherwise I'd re-post it on my new "blog").

I really recommend Selgin's The Theory of Free Banking. It's relatively short (no more than 200 pages, I think), but every page is packed with detail and it's easy to digest. Honestly, I didn't really know what I was critiquing until I read Selgin's book, and then I was persuaded.

I guess I'm not really even trying to "critique" necessarily, as Jonathan says, although the evidence comes out in a way that makes me scratch my head over the claim.

Competing currencies are not outlawed in the United States, after all. Can Jonathan or Lee give me a good explanation of why we're not seeing private institutions stepping in to pick up this $20 bill sitting on the sidewalk? I'm still not sure why they're not doing that.